Finding finance for CO2 reduction

Barriers to the availability and flow of finance to projects aimed at carbon reduction are primarily a function of financial sector structure and market maturity. Some of these barriers are not unique to low-carbon projects, but apply to project finance in South Africa as a whole.

In some instances, barrier resolution is just a matter of time.
However, while the market matures and we search for innovative financial models, smaller barriers with shorter-term victories can be addressed. There is a commonly held view that the private sector has large amounts of capital and is not investing it in low-carbon and other development projects.

These perceptions prompted the National Business Initiative (NBI), with support from KPMG's climate change and sustainability unit, with funding from the British High Commission Prosperity Fund, to investigate the barriers to low-carbon project finance.

The NBI conducted semi-structured interviews with stakeholders across industry bodies, large and small businesses, government, project developers and the financial services sector.

The resulting perceptions survey shows experts and practitioners believe that, while each stakeholder has areas for improvement, a shared understanding of the complexities of low-carbon project finance is needed.

A widely held view was that there is a potential misalignment between the structure of the financial sector and the goals of national policy. South Africa's industrial policy and vision for the green economy, as encapsulated in documents like the new growth path and the national development plan (NDP), are seen to position the country as a technology leader.

The NDP in particular sets a goal in the green economy chapter for South Africa to be an exporter of low-carbon technologies. However, there are shortages of capital in early-stage, higher-risk technology development due to structural issues in the finance sector.

There is little venture capital and private equity funding, while grant funding tends to be focused on small (less than R50-million) projects. As a consequence the financial sector is geared towards fast-following rather than being a technology leader.

What requires exploration is whether these structural barriers are a function of market maturity, or whether more concerted private and public sector action is required to address these long-term barriers.

Questions were also raised about the function of national policy in providing clear direction on key technologies that are required to transform the economy. Both financial institutions and project developers would prefer stronger policy signals from the government, which in some cases may amount to "big bets" on particular sectors of the green economy.

The positive impact of providing future certainty through clear policy signals was illustrated in the recent roll-out of renewable energy. Commercial and development banks contributed between R70-billion and R80-billion towards establishing renewable-energy projects, once clear and stable policy frameworks were established.

A primary challenge is better information to help guide decision-making. Which are the "big bets" that the government can incentivise, and can the views of all stakeholders be considered in choosing them?

This would help business and project developers' direct activities and investment, and will assist the government to align future policy and minimise transaction costs.

Steve Nicholls is programme manager: climate change and water at the NBI. This article is based on an NBI study currently in a consultation phase and available on the NBI website (www.nbi.org.za).

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